Multinational Corporations in the World Economy

April 24, 2013
• Multinational corporations (MNCs) are companies based in
one state but operate globally, with fixed facilities and
employees in several countries.
• Types of MNCs:
• Industrial corporations: corporations that manufacture
goods and sell them in various countries (cars, electronics)
• Financial corporations: banks that operate in several
• Service corporations: entities that provide services in
several countries (telephone services, airlines)
• Mercantilist view: MNCs take on the identity of a state, pursue a
state’s interests and generally act as an agent of a state in the
global economy. Thus should be treated with suspicion because
they are foreign agents.
• Revolutionary or revisionist view: MNC’s control a state, whose
government acts as the MNC’s agents and uses public policy to
push forward the interests of the MNC. Thus MNCs should be
treated with suspicion because of their power
• Liberal view: MNCs are independent of any state, pursuing their
own interests in the form of profits, owing no loyalty to any
state, acting as its own agent and neither controlling nor under
the control of any state. Should be treated the same as any
other company in terms of its interests and how it pursues profits
• MNC’s can have revenue in the billions of dollars. Thus their
operations can have a significant impact on the economies of states,
whose GNP’s are sometimes smaller than MNC revenues. Wal-Mart:
revenue larger than the GDP’s of all but 35 states.
• Push for global interdependence and a liberal world order:
• Having operations in different states, are interested in breaking down
economic barriers among them
• Often develop and draw upon a group of managers and specialists who
cross borders and tend to have loyalties to the companies than to states
• Push for an world environment that is peaceful, so as not to interrupt business
• Push for the stability of international rules and the international order in
general because predictable rules and regulations are less expensive to
follow than those that constantly change
• Push for free flows of labor, trade and capital flows.
• Parent corporation in home country (country in
which the MNC is registered and based), which
is subject to the laws and regulations of the
home country.
• Parent corporations may be engaged in
manufacturing, finance or services themselves or
be a holding company (a company that owns or
controls a majority of another company’s stock,
but engages in no economic activities itself).
• Subsidiaries (companies owned by another
country) of the MNC operate in host countries
and are subject to the laws and regulations of
the host country. While physically separate from
the parent corporation, they are managerially
and otherwise connected, as they are staffed
by the parent company and the strategy,
operations and profits of the subsidiaries are
also controlled by the parent company.
• MNCs are an important source of direct foreign investment in
countries. Investment is the act of exchanging money for the
ownership of capital, mostly in the form of building, factories,
vehicles, machinery.
• Such foreign investment in tangible capital, as opposed to
investment in bonds, securities or currency, is not portable. For
the most part it is impossible to move factories out of a country.
• It is also part of a long-term commitment and strategy. The
acquisition of tangible capital is not worthwhile in the short run,
as it will also entail investment in a managerial staff, worker
training, legal operations, the building up of a supply and client
chain, etc.
• Mercantilists: FDI is a way for a country to lose
control over its economic foundations to foreign
countries; thus FDI can be a threat to national
security and sovereignty, and to the overall
economic well-being of the country, as profits
and control of economic activities are in the
hands of foreign nationals.
• Economic nationalists in developing countries: while
the FDI that MNCs bring is needed to develop the
economy, there is the chance that it is the way for
other countries to exploit and colonize the country,
as was the case in the past. So welcome the
investment but worry that it comes at a high price
in terms of long-term economic well-being and
national security
• It is also the means by which traditional culture and
economic activities are displaced and destroyed,
thus threatening the identity of the country.
• Economic nationalists in developed countries: also are
worried that FDI means loss of economic control to
foreign powers. Worry that competitors will dampen
economic growth by repatrioting profits (sending
profits from subsidiaries back to the home company)
and will gain control of key industrial sectors and
natural resources– airplane and defense
manufacturers, energy companies, oil companies.
• Thus often believe that FDI is a threat and should be
• Liberals: FDI is good because it spreads economic activity across
borders, spurs growth in all countries, and contributes to greater
economic efficiency in the global economy by enabling
economic activity to take place where the conditions for doing
business are most favorable.
• Because FDI produces jobs and economic activity in host
countries, it is beneficial to those countries, whose level of
economic activity and prosperity would be lower if not for that
investment. Tend to worry less about the national security
aspects of FDI because hold that the more international
economic activity there is, the less likely conflicts will lead to
war. International economic activity tends to foster cooperation
and non-violent conflict resolution.
• Relations between and MNC and its home country can be
complicated by the fact that the MNC has subsidiaries in
particular countries that may or may not be friendly to the
home country.
• Thus a MNC may invest in a country that the home country
wishes to isolate economically and politically; thus, it might be
punished by the home country through fines, or its directors
subject to criminal prosecution. Ex: US companies that would try
to create subsidiaries in Iran.
• This relationship also might become complicated because of the
actions of the home country or the actions of a host country.
• The home country may initiate hostile operations against the
host country of an MNC subsidiary, resulting in the confiscation
of the subsidiary company’s property in the host country. The
prospect of such an action may lead the MNC to lobby the
home government against hostile actions, or to blame the home
government for the loss of its property and claims for
• A host country may also confiscate the property of a subsidiary
for other reasons, cause the parent MNC to lobby its home
country government to pressure the host country to reverse it
actions or compensate the MNC.
• Decisions to base a subsidiary in a host country usually follows
negotiations in which the MNC attempts to extract the most
favorable terms possible from the host government in which the
host government attempts to lure the MNC to invest and the
MNC threatens to take its investment elsewhere unless favorable
conditions are created:
Favorable tax treatment
Creation of infrastructure
Investment in relevant education of workforce
Relief from environmental, safety and other regulations
Favorable treatment for goods imported as part of manufacturing
• Governments break agreement on taxes, infrastructure, etc. This
may be the result of a change in government, a change in the
economic environment or a change in the political environment.
This poses problems for the MNC because once it has invested,
it is difficult to take that investment out– cannot move capital,
may be difficult to sell the subsidiary for a reasonable price.
• Host country nationalizes the subsidiary. To nationalize: the
action by a government to convert capital from private to public
ownership and control.
• Changes in host country’s trade policies that hurt
the subsidiary because meant to help the
country’s citizen-owned corporations. For
example, trade restrictions that limit imports of
cheap goods important to a manufacturing
process, forcing the subsidiary to buy more
expensive goods from local vendors. Countries
may also specify that a certain percentage of
the materials used in a manufacturing process
be sources from local suppliers.
• Changes in monetary policy that weaken the value of the host
country’s currency may make the important of crucial materials
more expensive.
• Civil wars or domestic violence may hurt business, or damage or
destroy capital, leading to the withdrawal of the MNC or the
suspension of its operations in the host country.
• Lobbying, advertising, location of facilities in particular regions
that benefit political figures
• In some countries, campaign contributions.
• Corruption, in the form of bribes, gifts, kickbacks
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